From UPSC perspective, the following things are important :
Prelims level : NBFCs and their regulations
Mains level : Not Much
The Reserve Bank of India (RBI) has suggested a tougher regulatory framework for the non-banking finance companies’ (NBFC) sector to prevent the recurrence of any systemic risk to the country’s financial system.
Try this PYQ:
Which of the following can be said to be essentially the parts of Inclusive Governance?
- Permitting the Non-Banking Financial Companies to do banking
- Establishing effective District Planning Committees in all the districts
- Increasing government spending on public health
- Strengthening the Mid-day Meal Scheme
Select the correct answer using the codes given below:
(a) 1 and 2 only
(b) 3 and 4 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4
What are NBFCs?
- Nonbank financial companies (NBFCs) are financial institutions that offer various banking services but do not have a banking license.
- An NBFC in India is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by a government or local authority, or other marketable securities.
- A non-banking institution that is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments is also an NBFC.
What is the difference between banks & NBFCs?
NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:
- NBFC cannot accept demand deposits
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
- The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks
What are the new RBI regulations?
- The regulatory and supervisory framework of NBFCs will be based on a four-layered structure — the base layer (NBFC-BL), middle layer (NBFC-ML), the upper layer (NBFC-UL), and the top layer.
- If the framework is visualized as a pyramid, at the bottom of the pyramid will be those where least regulatory intervention is warranted.
- It can consist of NBFCs currently classified as non-systemically important NBFCs.
- Moving up, the next layer may comprise NBFCs currently classified as systemically important NBFCs (NBFC-ND-SI), deposit-taking NBFCs (NBFC-D), HFCs, IFCs, IDFs, SPDs, and CICs.
- The regulatory regime for this layer shall be stricter compared to the base layer.
- The next layer may consist of NBFCs identified as ‘systemically significant’.
- This layer will be populated by NBFCs having a large potential of systemic spill-over of risks and the ability to impact financial stability.